If you’re receiving Canada Pension Plan (CPP) benefits or are planning to apply soon, you may have concerns about the Old Age Security (OAS) clawback. This clawback is a reduction in OAS payments that occurs if your annual income exceeds a certain government-set limit. For the most recent tax year, if your income surpasses $90,977, you will lose $0.15 for every dollar earned over that threshold.
In practical terms, this means that for every $1,000 you earn over the limit, you lose $150 in OAS benefits. If your total income reaches $149,000 or higher, you could lose all of your OAS payments, which can be as much as $7,040 annually. The clawback is assessed based on the income reported in your annual tax return, and any changes will start impacting your OAS payments in July of the following year.
Understanding how the OAS clawback works, as well as how CPP payments affect your overall income, is essential for managing your retirement finances and maximizing your benefits.
Table of Contents
- Understanding the OAS Clawback
- Ways to Minimize or Avoid the OAS Clawback
- Additional Considerations
Understanding the OAS Clawback
The OAS clawback, also called the OAS Recovery Tax, reduces OAS payments based on your income. It is assessed each year using the net income reported on your tax return. The higher your income, the greater the clawback, which can eventually result in a complete elimination of your OAS payments if your income exceeds the set limit.
Canada Pension Plan (CPP) payments are included in this calculation, meaning that receiving CPP benefits could contribute to the risk of an OAS clawback. For example, if you earn $80,000 from other sources and receive $20,000 in CPP payments, your total income of $100,000 would surpass the clawback threshold, leading to a partial reduction of your OAS benefits.
Ways to Minimize or Avoid the OAS Clawback
There are several effective strategies to reduce or avoid the OAS clawback entirely.
1. Delay Taking CPP Benefits
One of the most effective ways to lower your net income and avoid the OAS clawback is to delay your CPP benefits. While OAS typically starts at age 65, you can choose to delay your CPP payments until age 70. By doing so, you can keep your taxable income lower in the early years of retirement, which can help you avoid the clawback.
Delaying your CPP also has another benefit: it increases your monthly payout. The CPP amount increases by 8.4% per year if you delay it after age 65, meaning you’ll receive higher payments when you eventually begin taking it.
2. Reduce Employment or Pension Income
If you are still working or receiving pension income in your 60s, one option is to reduce your employment income or scale back your pension income. By lowering your overall taxable income, you can stay below the clawback threshold and keep your full OAS benefits.
3. Claim More Tax Deductions
Maximizing your tax deductions is another strategy to reduce your taxable income and avoid the OAS clawback. Tax deductions such as medical expenses, charitable donations, and other eligible expenses can help lower your net income.
For example, medical expenses exceeding 3% of your net income or donations to approved charities are tax-deductible. Carefully tracking and claiming these deductions can significantly reduce your income, which can help minimize or eliminate the OAS clawback.
4. Contribute to an RRSP
Contributing to a Registered Retirement Savings Plan (RRSP) is a powerful way to reduce your taxable income. The contributions you make to an RRSP are tax-deductible, lowering your net income for the year. By contributing to your RRSP, you can reduce your income to a level that is below the OAS clawback threshold.
Not only does contributing to an RRSP help you avoid the OAS clawback, but it also allows you to grow your savings tax-deferred until you withdraw them in retirement.
Estimated OAS Clawback at Different Income Levels
| Income Level (CAD) | Clawback Rate (15%) | OAS Clawback Amount (Approx.) |
|---|---|---|
| $90,977 – $100,000 | 15% | $1,350 |
| $100,001 – $110,000 | 15% | $2,850 |
| $130,000 – $140,000 | 15% | $7,350 |
| $149,000+ | Full Clawback | Complete OAS Reduction |
Additional Considerations
- Spousal Income Splitting: If you are married or in a common-law relationship, income splitting can help reduce your taxable income. By reallocating some of your retirement income to a spouse with a lower income, you can keep your combined income below the clawback threshold.
- Tax-Free Savings Account (TFSA) Withdrawals: Unlike RRSP withdrawals, TFSA withdrawals do not count as taxable income. If you need extra funds in retirement, consider withdrawing from your TFSA rather than from other taxable sources. This way, you can avoid triggering the OAS clawback while having access to your savings.
Conclusion
The OAS clawback can significantly impact retirees, but with careful planning, you can reduce or avoid it altogether. By delaying your CPP benefits, reducing your income from employment or pensions, maximizing tax deductions, contributing to an RRSP, and using strategies like income splitting or TFSA withdrawals, you can better manage your finances and keep more of your OAS payments.
It’s important to consult with a financial advisor to tailor these strategies to your unique situation, as retirement planning is highly individualized. Taking proactive steps can help you enjoy a financially secure retirement while retaining as much of your OAS benefit as possible.